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The amount of evidence stacking up that hedge funds, mutual funds
and even private equity do not provide value for their investors
is just staggering.

The latest figures reported in the FT showed that 70% of the profits of private equity had been
gobbled up by the managers rather than the investors. While there
are certainly signs that the public's tolerance of excessive fees
and executive pay is falling, the likelihood of significant
structural change in the finance industry is still remote.

Given such a backdrop the probability remains that investors in
funds will on average continue to underperform their benchmarks.
So what is an investor to do?

We still believe that individuals who have the time and
discipline to do their own research and think outside the box
should look to invest the equity portion of their own funds
directly in the stock market. We appreciate that not every
investor has the interest or inclination to do this but a few
more might be likely to if they seriously considered how
compromised the alternative is.

Here follows a rundown of ten key reasons why investing in managed funds is such a losers
game and then we propose a few alternatives:

Hidden Costs. The real cost of owning a
fund is not published - it is hidden away as reduced performance. Once
transaction costs, tax costs, cash drag, soft dollar
arrangements and advisory fees are added to the published
expense ratios the total annual cost of owning a fund can be
over 4%!

Agency Issues. Most fund managers typically
get rich on fees rather than from making good investments
skewing their incentives towards asset gathering and retention
rather than investment performance. As Fred Schwed wrote back
in the 1940s,quot;**Where are the Customers'
Yachts**quot;?

Career Risk. Fund Managers' careers may be at
risk if they don't report consistent quarterly results. This
bias promotes short termism, over-trading, 'herd' behaviour and the chasing of momentum
stocks which can often end catastrophically.

The 'Star' Issue. Evidence is growing that
traditional 'star' stock picking fund managers like Bill Miller and Anthony Bolton are
struggling to adapt to the evolving 'risk on, risk off' market
structure. Many have been registering significant
underperformance in recent years.

Time Weighting of Performance. The average
dollar invested in a fund radically underperforms the reported
return. This is primarily due to the fact that funds report
their returns in a time weighted rather than dollar weighted
fashion - a statistical trick chosen to inflate apparent
returns to potential investors.

Mean Reversion. Attracted to a fund with
strong historic returns? Don't be returns have a tendency to
mean revert and underperform in future. A recent study showed that quot;when
managers were compelled to invest extra cash from investor
inflows in stocks, they were unable to beat the
market.quot;

Redemption Delay. It can often take days or
even weeks to sell a fund. As many investors found out to their
great cost in the credit crunch, in times of poor liquidity the
possibility of getting your money out of less liquid funds at
all can be significantly reduced!

Lack of Transparency. While some funds do
publish their 'top holdings' many funds are clothed in secrecy
begging the question of what is it that you actually own? The
Bernie Madoff saga clearly showed how such a
lack of transparency can end disastrously.

As we've discussed elsewhere, the reason fund managers can't beat
the market is NOT because the market is
unbeatable. Essentially, as John Bogle has always explained, the fund
management industry shows evidence of institutionally bad
decision making, herd behaviour and excessive compensation. If
investors are looking for long term security, then they should
take matters into their own hands by learning to invest their
portfolio themselves.

If you can't find the time and discipline to dedicate to stock
market investment (which is probably likely!), we still recommend
investing in the stock market, but you should focus
on the very lowest cost passively managed funds.
ETFs and Index funds are the best bet and have been shown to beat
75% of actively managed funds. Warren
Buffett has been quoted as saying quot;If you have 2% a
year of your funds being eaten up by fees you're going to have a
hard time matching an index fund in my view.quot; In
fact, Warren Buffett believes so strongly that index funds will
beat hedge funds over the long run that he's even put a $1m bet on the Samp;P500 beating a fund of
funds over a 10 year basis.

The good news is that the growing social clamour over high fees
and excessive pay is leading to an increasing number of low cost
ETFs and quantitatively managed funds hitting the
market for investors. The future certainly is looking a lot
brighter for investors in funds, but stay vigilant, always think
of the costs and think before you act!